New graduates and young adults often juggle multiple financial priorities. After entering the workforce, it’s tempting to move past the student lifestyle and enjoy more freedom. Eventually, however, you’ll face a choice for any extra cash flow: should you invest or prioritize paying off student loans? As with many personal finance decisions, the right answer depends on your individual situation—especially the type of student loan you hold.
Investing vs. debt repayment
Investing tends to get more attention than debt repayment in the media and financial advice circles, which can make it seem like the obvious choice. The growing gamification of investing and social media stories about quick gains from meme stocks, cryptocurrencies or NFTs can fuel a real fear of missing out.
In reality, most successful investing is slow and steady. Even professional money managers often struggle to consistently beat the market. Because of that, a long-term, balanced view is usually best when weighing investing against paying down debt. Both strategies increase your net worth—either by building assets or reducing liabilities—so the choice comes down to which approach offers the greater benefit given your circumstances.
Consider these key factors: the interest rate on your student loans, whether the loans are interest-free, any employer matching on investment accounts, tax implications, and your likely time horizon for using the money you save or invest. Each of these can shift the balance toward investing or toward accelerating debt repayment.
No more interest on Canada Student Loans
If you carry a Canada Student Loan, note that the federal government permanently eliminated interest on these loans as of April 1, 2023. Interest that accrued before that date still needs to be repaid, but no new interest is accumulating. Some jurisdictions, such as New Brunswick for integrated federal-provincial loans, have taken similar steps.
Because certain federal student loan balances are now interest-free, they are less urgent to pay down from a purely cost perspective. If you can earn a positive return—whether by parking money in a high-interest savings account, a guaranteed investment certificate (GIC), an ETF, mutual fund or other investment—your money may grow faster by investing than by reducing an interest-free loan balance.
That said, federal student loans still require scheduled repayments, which generally begin six months after you stop being a full-time student. These payments can affect your borrowing capacity for mortgages, car loans and other credit, so eliminating debt can help your overall financial profile.
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Interest on provincial student loans
Provincial loans or private bank student loans usually carry interest. If your loan rate is, for example, 5%, investing instead of paying it down only makes financial sense if you expect to earn a higher return after fees and taxes. An important exception is employer-matched retirement or savings plans—contributing to a matched plan can deliver an immediate return that outweighs many loan interest rates.
Remember, you may be able to claim student loan interest on your tax return, which reduces the effective cost of carrying that debt. Eligible loans typically include those provided under federal statutes such as the Canada Student Loans Act and the Canada Student Financial Assistance Act, apprenticeship loan programs, and similar provincial or territorial legislation. Tax relief usually lowers your net interest cost by roughly the equivalent of your marginal tax rate, so check the rules that apply to your province or territory.
Do student loans affect credit scores in Canada?
Yes—student loans are part of your credit profile, but they do not automatically harm your credit score. On-time payments help build a positive history; missed or late payments can hurt your score and make it harder to qualify for additional credit. Lenders also consider your overall debt load relative to income when evaluating mortgage or loan applications, so reducing outstanding balances can improve borrowing power.
Do student loans count as income?
No—student loans are not treated as income for tax or income-reporting purposes. They are a form of borrowing. That said, eligibility for student loans and grants is often assessed based on income, including family income in some cases, which can affect the amount of support you receive.
What to think about before starting to invest
If your student loan is interest-free, if you receive employer matching on retirement or savings contributions, or if you have a strong tolerance for investment risk and a clear long-term horizon, investing may be the better choice for parts of your extra cash flow.
However, risk tolerance and time horizon deserve careful thought. Young people are often encouraged to invest aggressively because they have many years until retirement, but many also face shorter-term needs: continuing education, moving expenses, a car, first and last month’s rent, furniture, travel, a home down payment, a wedding or starting a family. Limited investing experience can also make newcomers more vulnerable to losses during market volatility.
Paying down student debt is a sound decision in many cases. If you choose to invest, prioritize tax-advantaged accounts—especially a tax-free savings account (TFSA)—to shelter gains and withdrawals. If you focus on debt repayment, understand your loan’s repayment terms, the true interest cost after tax, and be sure to claim any eligible tax credits for student loan interest paid.
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More about student finances:
- Struggling with student debt? Here’s how to pay off student loans faster
- RESP vs RRSP and TFSA: Choosing the best vehicle for education savings
- The best student bank accounts in Canada
- What to do when you have insufficient or unused RESP funds